Chapter 1: Introduction to Futures Trading
Preface: History of Futures
There are many theories as to how Future Contracts started, some believe that in the year 1967 – The Dojima Rice Exchange, in Osaka, Japan is considered to be the first futures exchange market, to meet the needs of samurai who were being paid in rice as they needed a stable conversion to coin after a series of bad harvests.
Later, The Chicago Board of Trade (CBOT) listed the first-ever standardized “exchange-traded” which started getting known as futures contracts. After the CBOT, the Agri commodities trading trend started picking up momentum.
Now, there were futures contracts for not only grain trading but for different commodities. Also, a number of exchanges are starting to emerge across the world.
From the year 1875, cotton futures were being traded in the financial capital of India, Mumbai ( earlier known as Bombay ) and within a few years, this had expanded to futures on edible oilseeds complex, raw jute and jute goods and bullion. In the 1930s two thirds of all futures were in one single commodity which was Wheat.
Financial futures were introduced in 1972, and fast forward to now, there are futures contracts to trade in currencies, stock market indexes, interest rate futures and even in cryptocurrencies where they have perpetual futures contracts which are increasingly popular with traders across the world.
History Of Derivative Market In India
Derivative markets have been evolving in India for a long time. Derivative Markets gained popularity in the year 1875 when the Bombay cotton trade association started future trading in India.
However, the Government of India banned cash settlement and options trading and so derivatives trading shifted to an informal forward market.
Fast forward to the year of Y2K, derivative trading commenced in India in June 2000 after SEBI granted the final approval to this effect in May 2001 on the recommendation of the L.C.Gupta committee.
SEBI permitted the derivative segments of 2 stock exchanges NSE and BSE and their clearing house/ corporation to commence trading and settlement in approval of derivative contracts.
In recent times, the F&O market made record high turnover crossing over 200 lakh crores, and is growing at a much faster pace. By the way, do you know who brought forward the concept of Derivatives to the world? A bunch of farmers!
Here is the story behind it! It all started In the 19th Century when farmers in the US had two issues:
Finding Buyers for their commodities and de-risking themselves in case of price fluctuations. To solve this, they created a joint market called the Chicago Board of Trade (CBOT) which later evolved into the first-ever derivatives market called the Chicago Merchantile Exchange.
They standardized the contracts here, where buyers & sellers traded at a fixed price on a future date, which we call the ‘Futures’ contract today. And BOOM! The derivatives market exploded since then.